{"id":1914,"date":"2017-07-13T09:39:47","date_gmt":"2017-07-13T16:39:47","guid":{"rendered":"http:\/\/www.projectp.com\/ppblog\/?p=1914"},"modified":"2022-11-21T08:37:22","modified_gmt":"2022-11-21T16:37:22","slug":"step-3-determine-the-transaction-price-revenue-recognition-standards","status":"publish","type":"post","link":"https:\/\/www.projectp.com\/ppblog\/2017\/07\/13\/step-3-determine-the-transaction-price-revenue-recognition-standards\/","title":{"rendered":"Step 3: Determine the Transaction Price – Revenue Recognition Standards"},"content":{"rendered":"

Part of our ASC 606 New Revenue Recognition Standards blog series. Previous posts include:\u00a0Introduction to Achieving ASC 606 Compliance<\/a><\/span>, Step 1: Identify the Contract with the Customer<\/a><\/span>, and Step 2: Identify Performance Obligations in the Contract<\/a><\/span>.<\/em><\/span><\/p>\n

This blog continues our discussion on the impacts of the new ASC 606 revenue recognition standard issued by FASB and IASB and reviews the third step in the five-step model for recognizing revenue from contracts with customers.<\/p>\n

\"Step<\/a><\/p>\n

The Transaction Price is the amount of consideration an entity expects to receive for transferring goods or services to the customer.\u00a0 The amount can be fixed, variable, or a combination of both.\u00a0 Transaction Price is allocated to the identified performance obligations in the contract.\u00a0 These amounts are recognized as revenue when the performance obligation is fulfilled.<\/p>\n

Future options for a contract are excluded when determining Transaction Price, as are the amounts third parties will eventually collect, like sales tax.<\/p>\n

When dealing with a fixed amount to be received, the Transaction Price is easy to determine.\u00a0 However, other situations require more judgment:<\/p>\n

Variable Consideration<\/strong>
\nIt is considered variable if the amount of consideration is subject to change due to timing or other performance factors.\u00a0 Examples include refunds, credits, discounts, incentives, and other items.\u00a0 Since the Transaction Price estimates the amount of consideration an entity expects to receive, any constraints on that amount must be considered.<\/p>\n

Significant Financing Component<\/strong>
\nThis occurs when the timing between the receipt of consideration and the transfer of goods\/services is more than one year.\u00a0 The entity must therefore recognize revenue at an amount that reflects the cash payment the customer would have made when the goods\/services were transferred to them (cash selling price).\u00a0 Financing components in the Transaction Price, therefore, considers the time value of money.<\/p>\n

Noncash Consideration<\/strong>
\nIf a customer receives payment in a noncash form, then the fair value of the noncash payment is included in the Transaction Price.\u00a0 If the fair value cannot be determined, the standalone selling price of the goods\/services is used.<\/p>\n

Consideration Paid or Payable to a Customer<\/strong>
\nAt times the entity will be required to make a payment to the customer, such as with a manufacturer’s rebate.\u00a0 This payment reduces the Transaction Price, and the revenue recognized.\u00a0 In some cases, however, this could be considered a purchase expense from the customer.<\/p>\n

Nonrefundable Upfront Fees<\/strong>
\nMembership fees or activation fees for services such as television or internet services are examples of nonrefundable upfront fees.\u00a0 These fees are paid in advance for the right to a service or good with no guarantee that the fee payment will be returned.\u00a0 The entity must make the determination of whether the fee relates to a specific transfer of goods\/services or a renewal option at a reduced price.\u00a0 The changes in the new Standard require that all products and services must have a Standalone Selling Price (\u201cSSP\u201d).\u00a0 This SSP must represent the fair value of the products and services offered.\u00a0 All entities need to monitor and adjust their SSP regularly, at least annually.<\/p>\n

Using Oracle Projects to Meet the Objectives of Step 3 of the ASC 606 Revenue Recognition Standards<\/strong><\/h2>\n

In our previous paper, we described three types of contracts typical to service delivery organizations:<\/p>\n